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A startup’s best friend

Corporate paradox is a start-up's best friend

Lessons learned from investor by Eric Manlunas
April 23, 2009
Short URL: http://vator.tv/n/82a

 Oftentimes early-stage investors, yours truly included, get intimidated when analyzing an interesting early-stage opportunity that is attempting to compete in a space where an 800lbs gorilla seems to already be deeply entrenched.  After all, while the "David & Goliath" story is awe inspiring and makes for a great bedtime story, I don't believe investors would have been willing to fund David's "epic" battle --- in fact I'm pretty sure David was not a fundable commodity back then.

However, upon just a little bit of reflection on how businesses have evolved historically, one would easily understand how 800lbs Gorillas don't have a lifetime lock on their markets.  History has proven this phenomenon time and time again.  People fondly call it the ‘corporate paradox.'

While there's no such thing as a "sure thing" in the early-stage start-up world, there's also no such thing as "not a chance" even if it's already a crowded space or a segment already dominated by a so-called 800lbs Gorilla or category killer.  Early-stage companies and large corporations view the world very differently.  As such, they have different views of the essentials of success.

When early-stage companies reflect on what elements they need to pursue to be successful, INNOVATION and DISRUPTION prominently factor in to those mental exercises.  As a matter of fact, these are the two main ingredients that venture capitalists look for when scouring the space for breakout ventures.  As a practical matter, these are the two most important factors early-stage companies need to adhere to in order to give themselves a fair shot at success.

On the other hand, Innovation and Disruption, while two words large corporations occasionally like to banter around to their shareholders, are the complete antithesis to a large corporations' definition of success.  Let's examine why --- for a large corporation to succeed, especially large publicly-traded companies with demanding yet shortsighted investors, they need to be STABLE and PREDICTABLE.  In fact, stability and predictability are the two main ‘must haves' for legendary investor Warren Buffett even before he considers an investment --- if you don't believe me go ahead and read his annual shareholder letter.  In addition, financial advisors and analysts love being able to predict future earnings and for that to happen stability is a must --- corporate stability makes these guys look smart!

That paradox is the gap early-stage companies can and must exploit.  Regardless of their market lead, large corporations need to constantly innovate and disrupt for them to keep their leadership position.  Unfortunately, given today's short-term trading culture, their investors essentially prohibit them from doing so by discouraging anything that would reduce cash flow - after all, innovation has its costs.  Lack of innovation and disruptiveness are ultimately what makes these large corporations lose their lead or worse become mediocre players in a space they once dominated. 

The last 30 years would make a great case study for this.  In fact, numerous emerging companies were so successful in exploiting this gap to a point that they eventually became the new 800lbs Gorillas in their respective segments.  That's great for emerging companies but let us hope these new gorillas don't forget what swept them to the top.  Some of the more notable examples are the following:  there's a reason why 135-year old Barnes & Noble didn't become Amazon.com, why 157-year old Western Union didn't become PayPal, why Blockbuster didn't become Netflix, why Yahoo! didn't become Google, why Xerox didn't become Apple, why Digital Equipment didn't become Dell, why IBM didn't become Microsoft in the end of the 70s, so on and so forth.  I'm sure you get the point.

I'm sure there are also lots of notable examples on how 800lbs Gorillas have been able to hold on to their leads by constantly innovating and disrupting.  Few examples that come to mind are Intel, Oracle and Cisco --- albeit Oracle and Cisco have done their ‘innovation and disruption' mostly through M&A transactions.  R&D by way of M&A works as well especially if you have a deep balance sheet.

So to all you innovative and disruptive entrepreneurs out there (and their potential investors), keep this historical perspective in mind when you're feeling a little discouraged by the current dominance of the 800lbs Gorilla in your space.  I assure you that it's not going to be forever.  You too can become a David!

(Image source: http://fearlessfathers.files.wordpress.com)